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Convergys (CVG)
Jana Partners converted its filing status to activist investor, from passive. The hedge fund said it already has had "constructive dialogues" with executives of the human-resources systems provider on ways to improve shareholder value ( see the Activist Spotlight, at right). Following Convergys' second-quarter earnings report, which included lowered '08 guidance, Jana determined "to reserve its right to take steps to bring about changes to increase shareholder value, which may include changes in the board composition, strategy and future plans of the company, as well as the pursuit of other plans or proposals." Jana holds about 12.2 million shares (9.9%).

BUSINESS OVERVIEW

Overview

Convergys Corporation (the Company or Convergys) is a global leader in relationship management. We provide solutions that drive more value from the relationships our clients have with their customers and employees. Convergys turns these everyday interactions into a source of profit and strategic advantage for our clients. For 25 years, our unique combination of domain expertise, operational excellence and innovative technologies has delivered process improvement and actionable business insight to clientsâ€™ customers and employees that now span more than 70 countries and 35 languages.

Our unified business focus is serving one overriding business need: relationship management. Our clients depend on our solutions and expertise, allowing them to focus more of their resources on their core competencies. By providing a wide range of relationship management solutions for our clients, we have developed a base of recurring revenues, generally under multiple year contracts. We provide our clients with comprehensive solutions to support their customers (Customer Solutions) and employees (HR Solutions). Our Customer Solutions enhance the value of their customer relationships, turning customer experience into a strategic differentiator. Our HR Solutions help transform large enterprises to drive more value from employee relationships, fostering greater organizational effectiveness and lowering costs. These solutions are supported by the business segments which are detailed below.

Our principal executive offices are located at 201 East Fourth Street, Cincinnati, Ohio 45202, and the telephone number at that address is (513) 723-7000. We file annual, quarterly, current reports and proxy statements with the SEC. These filings are available to the public over the Internet on the SECâ€™s Web site at http://www.sec.gov and at our Web site at http://www.convergys.com. You may also read and copy any document we file with the SEC at its public reference facilities in Washington, D.C. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You can also inspect reports, proxy statements and other information about Convergys at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

Business Segments

The Company has three segments: Customer Management, which provides outsourced customer care solutions as well as professional and consulting services to in-house customer care operations; Information Management, which provides convergent rating, charging and billing solutions for the global communications industry; and Human Resources Management, which provides human resource business process outsourcing (HR BPO) solutions and learning solutions. The Companyâ€™s business segments were renamed in 2007 to align with the Companyâ€™s rebranding efforts.

Pursuant to Rule 12b-23 under the Securities Exchange Act of 1934, as amended, the industry segment and geographic information included in Item 8, Note 12 of Notes to Consolidated Financial Statements, are incorporated by reference in partial response to this Item 1.

Customer Management

Our Customer Management (formerly Customer Care) segment partners with clients to deliver customer solutions that enhance the value of their customer relationships, turning the customer experience into a strategic differentiator. We combine consulting and innovative technology services to optimize the customer experience and strengthen customer relationships. We provide comprehensive and integrated multi-channel care using a global service delivery infrastructure of live agent and automated services that operate 24 hours a day, 7 days a week and 365 days a year. Our services include multi-lingual program support.

Solutions provided by Customer Management include:

Customer Service Solutions

Customer Service Solutions include comprehensive outsourced business and consumer customer support functions, as well as services for in-house contact center operations. We provide a full range of automated and live agent solutions that provide consumer support, business-to-business support and technical support.

Customer Acquisition Solutions

Our Customer Acquisition Solutions identify and secure high-value consumer and business customers, maximize sales conversion rates and increase revenue per customer. Utilizing a full range of 24 by 7 automated and live agent solutions, we provide comprehensive sales and order support. In addition, we offer Direct Response Solutions to address the customer support needs of direct response marketing.

Customer Retention Solutions

We combine agent services, automation and analytics to optimize the level of customer satisfaction, build customer loyalty and address customer churn. Our programs are designed to help our clients retain their customers and increase their lifetime value.

Back Office Solutions

We offer complete outsourced Back Office Solutions that combine integrated document management, data entry and transaction processing capabilities with process expertise and workflow management. This helps our clients provide a more integrated and comprehensive service experience to their customers. We also provide Finance & Accounting Solutions, which includes Accounts Receivable Management Solutions and Accounts Payable Solutions. Our global labor pool supports a 24 by 7 customer support environment.

In 2007, a new group was established to accelerate the development of technology-enabled solutions that improve the quality and value of interactions across live agent and self-care channels. This group, called Relationship Technology Management, will focus on leveraging the latest advanced technologies in speech automation, real-time decisioning, web-based self-care, and multi-channel integration enhanced with analytics to capture and analyze intelligence from customer interactions. Revenues from these services are included within our Customer Management segment.

Over 90% of Customer Managementâ€™s revenues are derived from agent-related services. We typically recognize these revenues as services are performed, based on staffing hours or the number of contacts handled by service agents using contractual rates. In a limited number of engagements where the client pays a fixed fee, we recognize revenues based on the specific facts and circumstances of the engagement, using the proportional performance method or upon final completion of the engagement. Customer Managementâ€™s remaining revenues are derived from collection services and professional and consulting services. Revenues for professional and consulting services are recognized as the services are performed or upon completion of the engagement based on specific facts and circumstances of the engagement.

The Convergys Infinys Solution is our modular and convergent business support system software. It enables operators to implement a comprehensive business support system, or to choose single applications, such as the Convergys Infinys Rating and Billing Manager, configured to the operatorâ€™s specific business and operational requirements. Infinys delivers innovative support of convergent services â€” regardless of service channel or payment method. Our solutions enable clients to take products and services to market faster, leverage real-time marketing innovation, minimize risk and reduce operational costs. Infinys uses a modular, pre-integrated approach to reduce both capital and operating expenditures, while speeding the launch of convergent services and services bundles. Infinysâ€™ flexibility is a function of its three-layer design incorporating platform, applications and extensions.

Infinys Series 3, the current version of the software, provides clients the ability to support the following:

Content Enablement Solutions

Our end-to-end content enablement solution â€” a strong combination of products and services â€” provides essential merchandising, charging, policy management, digital rights management and partner/customer services capabilities. Focusing on providing a solution that fits the needs of our clients (end-to-end or a subset of applications), we make content services coherent, user-friendly and available to support the rapid launch of new offerings.

Convergent Charging Solutions

Our Convergent Charging Solutions facilitate the rollout of all new and advanced services and bundles to subscribers. This enables a real-time interface to, and/or co-location with, intelligent network platforms, supporting a single subscriber database and enterprise-wide product catalogue. The outcome is shared usage bundles within a single account, delivering engineering-grade scalability, availability and latency, and sustaining the major charging standards.

Enterprise Product Management Solutions

Using a blend of products and services, our Enterprise Product Management Solution can increase efficiencies across product management processes. This includes the ability to drive product consistency across the enterprise, centralize product data into a single enterprise-wide catalogue, create, manage and control products end-to-end, and provide a single view of all product and services customized for each customer.

Convergys ICOMS Solution

The Integrated Communications Operations Management System (ICOMS) solution is designed specifically for the broadband convergent video, high-speed data and telephony markets. It incorporates the power and flexibility of our cable television subscriber management system with the integrated support of high-speed data and wireline telephony.

Convergys WIZARD Solution

The WIZARD solution is designed to serve multimedia operators including direct broadcast satellite, direct-to-home, cable and cable telephony providers, by enabling them to extend their offerings to support voice, video and data services.

Consulting and Professional Services:

Consulting and Technology Services

Convergys provides strategic assessment, program management and program enhancements to help clients strengthen their competitive advantage.

Software Solutions

We deliver applications and solutions that support more innovative propositions and services for clients, including Infinys Series 3.

Global Service Delivery Options

We provide our software in one of three delivery modes: outsourced (service bureau), licensed or build-operate-transfer (BOT). In the outsourced delivery mode, we provide the billing services by running our software in one of our data centers. In the licensed delivery mode, the software is licensed to clients who perform billing internally. Finally, under the BOT delivery mode, Information Management implements and initially runs our software in the clientâ€™s data center where the client has the option to transfer the operation of the software to itself at a future date. Information Management has a rich history of building, implementing and operating a variety of BSS solutions for global providers.

Managed Operations

Managed Operations allows clients to maintain control of IT operations without operational responsibility. From business case development to implementation, execution and knowledge transfer, we can help determine the best model for each unique business situation. The objective of Convergysâ€™ operations practice is to help clients achieve measurable cost savings while continually driving efficiency through innovation. Our end-to-end services for managing clientâ€™s operations include Application Management Services, Application Support Services and Infrastructure Services.

These operations address a broad range of software solutions from Convergys products to commercial, off-the-shelf or home-grown applications. Day-to-day operations can be hosted either at a Convergys data center or the clientâ€™s location. Our personnel models are created to provide the most optimal solution. It can include Convergys dedicated resources and shared resources.

License and related support and maintenance fees, which accounted for 31% of Information Managementâ€™s revenues, are earned under perpetual and term license arrangements. We invoice our clients for licenses either up-front or monthly based on the number of subscribers, events or units processed using the software. We typically recognize professional and consulting services and license revenues using the percentage-of-completion method. Fees for support and maintenance normally are charged in advance either on an annual, quarterly or monthly basis and are recognized ratably over the term of the agreement. Professional services revenues, which accounted for 36% of Information Managementâ€™s revenues, consist of fees charged for installation, implementation, customization, enhancement and managed services. We invoice our clients for these services based on time and material costs at contractually agreed upon rates, or in some instances, for a fixed fee. Information Managementâ€™s remaining revenues consist of monthly fees for processing client transactions in Information Managementâ€™s data centers and, in some cases, the clientsâ€™ data centers, using Information Managementâ€™s proprietary software. These data processing revenues are recognized based on the number of invoices, subscribers or events that are processed by Information Management using contractual rates. We sometimes earn supplemental revenues depending on the satisfaction of certain service levels or achievement of certain performance measurement targets. We recognize such supplemental revenues only after we achieve the required measurement target.

HR Management

Our Human Resources Management (formerly Employee Care) segment partners with clients to deliver HR BPO and learning solutions that help transform large enterprises to drive more value from employee relationships, fostering greater organizational effectiveness and lowering costs. For 25 years, Convergys Human Resource (HR) Solutions have enabled Global 1000 companies to optimize employee relationships through business process outsourcing. Convergys utilizes a transformational approach to help clients harmonize HR processes, standardize global HR technology, and improve service delivery. The result is a greater level of workforce insight that enables enterprises to make better decisions and better manage global talent as a corporate asset.

Our large suite of HR BPO solutions includes the following:

Benefits Administration Solutions

We manage the complexities of benefits administration and provide clients the business intelligence they need to improve benefit-related processes, services and costs. Our solution combines self-service tools and state-of-the-art multilingual service centers to provide services to employees, including health and welfare administration services, retirement services and pension administration, absence management, carrier administration and tuition reimbursement.

Compensation Solutions

We help companies improve the clarity and parity of their global compensation plans while assuming global administration to lower overall costs and deliver key analytics. By aligning global compensation with other key HR processes, Convergys can help improve employee understanding of compensation strategies resulting in increased employee engagement.

Human Resource Administration Solutions

We help organizations transform the task of managing global employee paperwork and data into a harmonized, automated and highly-efficient process. Our solution incorporates process improvements and technology innovations to streamline global HR administration.

Learning helps companies manage the employee life cycle to get more from the talent that they have and develop the talent they need. Convergys integrates comprehensive learning services into its HR BPO solutions. By outsourcing select learning functions such as administration, operations, content development and sourcing to us, companies gain a better return on their investment.

Organizational Development/Performance Management Solutions

As a full-service HR BPO solutions provider, we offer effective Organizational Development and Performance Management that integrates aspects of Recruiting and Resourcing, Compensation, Learning and Workforce Intelligence to increase employee engagement and improve employee performance.

Payroll Administration Solutions

Our payroll services range from end-to-end payroll outsourcing to targeted process management for each point between employee time entry and payroll check production. We can manage the complexities of global payroll, including controls for accuracy and compliance to local regulations.

Recruiting and Resourcing Solutions

Our global Recruiting and Resourcing Solution can free HR departments from the administrative aspects of finding, hiring and on-boarding employees so that they can focus on higher-value activities such as staffing strategies and hiring decisions.

Workforce Intelligence Solutions

We offer comprehensive Workforce Intelligence solutions that turn HR information into business insight. Our solutions give HR the business intelligence it needs to make better decisions and better manage the global workforce.

We are a market leader in HR BPO solutions, the fastest growing HR services segment and a multibillion-dollar industry, by providing:

Comprehensive service delivery model â€” Our delivery model includes services for employees, managers and HR staff. We offer both self-service capabilities and live agent support from client-dedicated teams. Additionally, we focus on back-office requirements, compliance issues and more.

Unifying technologies and ERP expertise â€” Convergys technologies provide a cohesive system for managing workforce information, which allows companies to make fact-based decisions that add to business success.

We typically recognize revenues produced by HR Management once services are performed based on the number of employees or participants served by HR Management using contractual rates. We sometimes earn supplemental revenues depending on the satisfaction of certain service levels or achievement of certain performance measurement targets. We recognize such supplemental revenues only after we achieve the required measurement target. Prior to commencing our HR Management services for a client, we normally perform significant implementation activities including the installation and configuration of software, migration of participant data and development of methods and procedures. These set-up activities or implementations can take anywhere from one year to in excess of two years. We capitalize all direct and incremental set-up or implementation costs. To the extent a client pays directly for the set-up activities, we defer the proceeds. Once we begin to render services, we recognize the capitalized costs and fees ratably over the term of the arrangement.

Strategy

Our strategy is to enable our clients to gain more value from the relationships with their customers and employees. This value drives improved business performance and a sustainable competitive advantage for our clients. Key elements of our strategy include:

Deliver a Differentiated Value Proposition to Clients . As a global leader in Relationship Management, Convergys provides solutions that drive more value from the relationships our clients have with both their customers and employees. We will continue to provide operationally superior solutions by cost-effectively enabling the best technology and processes to deliver performance improvements for our clients. We leverage our unique blend of capabilities and strengths in four critical areas: business and customer strategy development, business and customer analytics, technology enablement and operational excellence to deliver superior operating performance and create a highly differentiated market position. Our strategy development capability helps clients to better define their customer experience and workforce effectiveness strategies. Our analytics and continuous improvement capabilities help clients better understand their customer loyalties, behaviors and segments, as well as the root causes of challenges in key business processes. Our technology knowledge enables our clients to implement intelligent self-care strategies for both their customers and employees. Our experience delivering excellent customer and employee operations allows us to help clients drive revenue generation and transform the HR workforce life cycle.

Invest in Our Business to Expand our Addressable Markets and Strengthen our Solutions . Our growth strategy is to continue to broaden and deepen our offer portfolio to provide our clients with comprehensive solutions to support their customers and employees. We will invest in the business wherever required (i.e., acquire new capabilities, expand into new global locations, attract and retain employee personnel with desired talent) to expand our addressable markets. We continue to identify and to operate in attractive markets where we can effectively provide differentiated value and deliver superior returns. We intend to expand operations globally with employees and partners who strengthen our ability to successfully serve and satisfy the demands of multinational clients.

Expand Our Relationships with Existing Clients . We focus on client satisfaction to maintain and grow our base business. Our intent is to grow by cross-selling new solutions and expanding our relationship management footprint within our clientsâ€™ organizations. Our clients have generally renewed their agreements, reflecting what we believe is a high degree of satisfaction and stability in our client base.

Aggressively Grow Our Client Base . We believe that the global market for relationship management solutions is large and underserved, and we intend to make significant investments to aggressively pursue this market. We continue to emphasize a consultative selling approach to further strengthen our leadership in the customer management and HR outsourcing markets by cross-selling other services. We are growing our consulting and professional services capabilities that leverage our combined expertise in communications business support software and services development, and customer care and HR outsourcing operating best practices.

Sustain Our High-Performance Culture to Drive Business Results . We believe that people drive performance, and we are committed to hiring and retaining the best performers and ensuring that they are committed to the success of our clients. Our competencies include our proven strength in recruiting, training, equipping, deploying and effectively managing very large groups of people with diverse skills on a global basis (people), expertise in operations and cost-effective service delivery (process), and design, development and delivery of innovative, scalable transactions and interaction applications (technology). We adhere to the principles of strategic HR, including emphasizing collaboration, goal alignment, pay for performance, continuous improvement and focus on accountability and results. We believe this approach drives superior execution, enabling us to consistently deliver significant value to our customers.

Our Customer Management segment principally focuses on developing long-term strategic outsourcing relationships with large companies in customer-intensive industries and governmental agencies. We focus on these types of clients because of the complexity of services required, the anticipated growth of their market segments and their increasing need for more cost-effective customer management services. In terms of Convergysâ€™ revenues, our largest Customer Management clients during 2007 were AT&T, Comcast Corporation (Comcast), The DirecTV Group, Inc. (DirecTV), General Motors Corporation and Sprint Nextel Corp. (Sprint Nextel). We provide customer management services to Sprint Nextel as a subcontractor to International Business Machines (IBM).

Our Human Resource Management (HR Management) segment primarily focuses on implementing human resource and learning services and solutions with large companies and governmental agencies. In terms of Convergysâ€™ revenues, our largest HR Management clients during 2007 were Boston Scientific Corporation, E.I. du Pont de Nemours & Co. (DuPont), the State of Florida, the State of Texas and Whirlpool Corporation.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Customer Management

Our Customer Management segment (formerly Customer Care), which accounted for 66% of our consolidated revenues in 2007, manages customer relationships on behalf of our clients through our multi-channel customer management contact centers and through consulting engagements. Phone and Web-based agent-assisted service channels provide customers with assistance across the entire customer lifecycle. We deliver these services using a variety of tools including computer telephony integration, interactive voice response, advanced speech recognition, knowledge-based management and the Internet through agent-assisted and self-service channels.

Customer Management principally focuses on developing long-term strategic outsourcing relationships with large companies and governmental agencies with the need for more cost-effective customer management services. As a global leader in Relationship Management, we provide solutions that enhance the value of customer relationships, turning customer experience into a strategic differentiator.

As more fully described below under the heading, â€śCustomer Management,â€ť Customer Managementâ€™s revenues increased 3% from the prior year to $1,866.1. The revenue growth in 2007 came from the communications vertical. Customer Managementâ€™s 2007 operating income and operating margin were $176.7 and 9.5%, respectively, compared with $202.4 and 11.2% in 2006. The decline in operating income and operating margin in 2007 reflects additional foreign exchange-related expense due to the weakened U.S. dollar as well as capacity expansion costs associated with ramping new business. We continue to address these challenges and are focused on driving growth in revenue and operating income for 2008 as the demand for outsourcing and automated solutions is strong.

Information Management

Our Information Management segment serves clients principally by providing and managing complex billing and information software that addresses all segments of the communications industry. We provide our software products in one of three delivery modes: licensed, build-operate-transfer (BOT) or outsourced.

In 2007, Information Management accounted for 25% of our consolidated revenues. Data processing revenues accounted for 33% and professional and consulting services accounted for 36% of Information Managementâ€™s revenues in 2007. The remaining Information Management revenues consisted of license and related support and maintenance fees earned under perpetual and term license arrangements. As more fully described below under the heading â€śInformation Management,â€ť Information Managementâ€™s revenues of $723.0 decreased 7% compared to the prior year mainly due to two large North American client migrations. Information Managementâ€™s 2007 operating income and operating margin were $130.9 and 18.1%, respectively, compared with $124.5 and 16.1%, respectively, in 2006. This significant improvement resulted primarily from our continued focus on reducing costs.

Information Management continues to face competition as well as consolidation within the communications industry. In December 2006, AT&T and Bell South Corporation (Bell South) merged. Prior to the merger, Cingular (a joint venture between AT&T and Bell South) was our largest client in terms of revenue. As a result of the merger, AT&T is now our largest client in terms of revenue. We have assisted AT&T with its strategy to migrate subscribers off of the AT&T Wireless billing systems (that we supported) onto AT&Tâ€™s two systems (one of which we support through a managed services agreement). The migration was completed during early 2007. In January 2008, AT&T informed us that it intends to migrate its subscribers from the system that we currently support through a managed services agreement onto AT&Tâ€™s other system over the next two years. Once this migration is complete, AT&T will continue to be an important client. In September 2005, Sprint PCS, a large data processing outsourcing client, completed its acquisition of Nextel Communications. In 2006, Sprint Nextel informed us that it intended to consolidate its billing systems onto a competitorâ€™s system. Sprint Nextelâ€™s current plan is to complete the migration of most of its subscribers from our billing system during 2008. The migration began in 2006.

Information Management continues to make steady progress around the world, while dealing with the near-term challenges due to client migrations in North America. During the past year, we entered into new Infinys license arrangements with multiple clients. We believe this is evidence of the marketâ€™s acceptance of Infinys, and we see an opportunity to build on these successes.

Human Resource Management

Our Human Resource Management (HR Management) segment (formerly Employee Care) provides a full range of human resource business processing outsourcing solutions including benefits administration, compensation, human resource administration, learning, payroll administration, performance management, recruiting and sourcing services to large companies and governmental entities. We take advantage of our economies of scale in order to standardize human resource processes across departments, business lines, language differences and national borders. For 25 years, our unique combination of domain expertise, operational excellence and innovative technologies has delivered process improvement and actionable business insight to clientsâ€™ customers and employees that now span more than 70 countries and 35 languages.

HR Management accounted for 9% of our consolidated revenues in 2007. As more fully described below under the heading â€śHuman Resource Management,â€ť HR Managementâ€™s revenues increased 21% to $255.2 from the prior year and its operating loss remained essentially flat at $38.3 reflecting additional costs incurred during early stages of new client programs. During the past few years, we have transformed HR Management into a leading player in the growing human resource outsourcing market. In connection with our efforts to grow the business and build a global infrastructure of human resource expertise and know-how, we have incurred significant start-up costs. Furthermore, despite our success in winning long-term outsourcing arrangements with several clients, the sales cycles for these arrangements have ranged from twelve to twenty-four months. For these reasons, coupled with the fact that we are in the early stages with many of our outsourcing arrangements, where margins tend to be lower, we have generated significant operating losses over the past few years.

Demand for human resource outsourcing is strong and we are one of the leaders in the large and growing human resource outsourcing market. Based on the contracts signed to date and opportunities in our sales pipeline, we remain confident that we will become profitable with this business in the future.

2007 vs. 2006

Consolidated revenues for 2007 were $2,844.3, up 2% from 2006. The increase reflects 3% growth in Customer Management revenues and 21% growth in HR Management revenues. Revenues from Information Management declined 7% compared to prior year, primarily due to anticipated client migrations. Operating income was $244.8 compared to $252.9 in the previous year. The decline in operating income in 2007 was primarily due to $25.7 decline in Customer Managementâ€™s operating income, which was partially offset by a decrease of $11.6 in long-term incentive plan expenses recorded at Corporate, largely reflecting the impact of our recent share price performance and Convergysâ€™ pay-for-performance policy, as well as a $6.4 increase in operating income at Information Management. Operating income included restructuring charges of $3.4 and $12.5 during 2007 and 2006, respectively.

As a percentage of revenues, costs of products and services were 64.6% compared to 62.9% in the prior year. The 170 basis point increase in costs of products and services as a percentage of revenues was due to an increase in Customer Management costs due to the negative impact of the weakening U.S. dollar as well as higher labor costs, and an increase in HR Management costs largely due to new client programs and implementations. These increases were partially offset by lower costs of products and services as a percentage of revenues incurred at Information Management. Selling, general and administrative expense of $554.9 increased 2% compared to the prior year. As a percentage of revenues, selling, general and administrative expenses were 19.5% compared to 19.4% in the prior year. This increase primarily reflects additional capacity expansion costs at Customer Management. The 14% decrease in research and development costs largely reflects increased efficiency and focused spending on Infinys software. The 11% decrease in depreciation expense primarily reflects assets that became fully depreciated. The 15% increase in amortization expense reflects impairment of certain acquired intangible assets in the fourth quarter of 2007.

As discussed more fully under the heading, â€śRestructuring Charges,â€ť we recorded net restructuring charges of $3.4 in 2007 versus $12.5 in 2006. In addition, operating income for 2007 was positively impacted by a decrease of $11.6 in long-term incentive plan expense recorded at Corporate largely reflecting the impact of our recent share price performance and Convergysâ€™ pay-for-performance policy. In 2007, we recorded equity income in the Cellular Partnerships of $14.3 compared to $11.8 recorded in 2006. Interest expense of $17.5 decreased from $22.8 in the prior year primarily reflecting a lower level of debt. The $1.3 increase in other income/(expense), net in 2007 was mainly due to decrease in our foreign exchange transaction losses. Our effective tax rate was 31.0% for 2007 compared to 32.0% in the prior year. The lower effective tax rate in 2007 was largely due to an increase in income in countries with current tax holidays. See Note 6 of Notes to Consolidated Financial Statements for further discussion related to effective tax rates.

As a result of the foregoing, 2007 net income and earnings per diluted share increased to $169.5 and $1.23 compared with $166.2 and $1.17 in 2006. Beginning January 1, 2007, we adopted FIN 48, â€śAccounting for Uncertainty in Income Taxes.â€ť Refer to Note 6 of the Notes to Consolidated Financial Statements for details related to the adoption of this Standard. The adoption of this Standard resulted in a reduction of $7.8 to our retained earnings at January 1, 2007.

2006 vs. 2005

Consolidated revenues for 2006 were $2,789.8, up 8% from 2005. The increase reflects 10% growth in Customer Management revenues and 30% growth in HR Management revenues. Revenues from Information Management were relatively flat compared to the prior year. Operating income of $252.9 increased 13% compared to the prior year, while operating margin grew to 9.1% versus 8.7% in 2005. Revenue growth with existing and new clients and increased productivity, utilization and efficiency contributed to the improvement in results. Operating income included restructuring charges of $12.5 in 2006 and $21.2 in 2005.

As a percentage of revenues, costs of products and services were 62.9% compared to 61.3% in the prior year. The 160 basis point increase in costs of products and services as a percentage of revenues was due to an increase in HR Management costs due to new client programs and implementations, and an increase in Information Management costs largely due to a change in the revenue mix from data processing to relatively lower margin professional and consulting services. These increases were partially offset by lower costs of products and services as a percentage of revenues incurred at Customer Management. Selling, general and administrative expense of $542.0 increased 2% compared to the prior year. As a percentage of revenues, selling, general and administrative expenses were 19.4% compared to 20.5% in the prior year, reflecting savings from ongoing cost actions and operational efficiencies. The 10% increase in research and development costs reflects increased spending by Information Management on Infinys software. The 41% decrease in amortization expense primarily reflects acquired client contracts that became fully amortized during the first quarter of 2006.

As discussed more fully under the heading, â€śRestructuring Charges,â€ť we incurred net restructuring charges of $12.5 in 2006 versus $21.2 in 2005. In addition, operating income for 2006 was negatively impacted by an increase of approximately $12 in long-term compensation expenses, recorded at corporate, related to restricted stock awards, stock options and long-term performance cash awards. The increase in the long-term compensation expense in 2006 primarily related to restricted stock units awarded in 2006 pursuant to the Companyâ€™s long-term incentive plan. Beginning January 1, 2006, we adopted SFAS 123(R), â€śAccounting for Stock-Based Compensation.â€ť The primary effect of the adoption of SFAS 123(R) resulted in compensation expense being recorded for stock options. See Note 9 to the Notes to Consolidated Financial Statements for further discussion related to stock-based compensation plans. The impact of adoption of this accounting Standard in 2006 was an additional expense of approximately $1.

In 2006, we recorded equity income in the Cellular Partnerships of $11.8 compared to $12.4 recorded in 2005. Interest expense of $22.8, compared to $21.2 in the prior year, reflects higher interest rates on lower levels of debt.

Other income of $2.7 compared to other expense of $1.4 in the prior year, mainly as a result of higher interest income. Our effective tax rate was 32.0% for 2006 compared to 42.6% in 2005. The lower effective tax rate in 2006 was largely due to improved international performance allowing the realization of previously unrecognized foreign deferred tax assets and an increase in income in countries with current tax holidays. See Note 6 of Notes to Consolidated Financial Statements for further discussion related to effective tax rates. The higher effective rate in 2005 largely related to additional tax expense resulting from repatriating approximately $187 in funds from foreign subsidiaries.

Customer Managementâ€™s revenues for 2007 were $1,866.1, up 3% from 2006. Revenue growth resulted from several existing clients in the communication vertical.

Revenues from the communication vertical increased 13% from the prior year, reflecting growth with several large wireless and cable clients, partially offset by a reduction in spending from a large communication client reflecting lower call volume due to a reduction in their programs. Volumes from this client have stabilized by the end of the year. Revenues from the technology vertical and financial services vertical decreased 1%, respectively, reflecting completion of programs with clients. Other revenues, which are comprised of clients outside of Customer Managementâ€™s three largest industries, decreased 12% from the prior year. This was primarily due to declines in transportation and government programs.

Costs and Expenses

Customer Managementâ€™s total costs and expenses were $1,689.4, a 6% increase from the prior year. Customer Managementâ€™s costs of products and services increased 5% to $1,244.1 from the prior year. As a percentage of revenues, costs of products and services were 66.7% for 2007 compared to 65.5% in the prior year. The impact of revenue growth and cost saving initiatives were offset by higher expenses of approximately $18 resulting from the impact of a weakened U.S. dollar, net of gains realized from the settlement of hedged instruments, as well as higher labor costs. Customer Management serves a number of its U.S.-based clients using contact center capacity in Canada, India and the Philippines. Although the contracts with these clients are typically priced in U.S. dollars, a substantial portion of the costs incurred to operate these non-U.S. contact centers is denominated in Canadian dollars, Indian rupees or Philippine pesos, which represents a foreign exchange exposure. During 2007 and 2006, these currencies strengthened against the U.S. dollar. Accordingly, the expenses of operating these contact centers, once translated into U.S. dollars, have increased.

As discussed in further detail in the section titled â€śMarket Risk,â€ť we hedge this exposure by entering into foreign currency forward contracts and options.

Selling, general and administrative expenses of $380.7 increased 13% compared to the prior year. This reflects higher costs from capacity expansions during the current year and also costs from adding sales and consulting resources. As a percentage of revenues, selling, general and administrative expenses were 20.4% for 2007 compared to 18.6% in the prior year. Compared to the prior year, research and development costs decreased $4, reflecting reduced spending on a Customer Management application. The 15% decrease in depreciation expense mostly reflects data center assets, which are now being managed in a shared service environment. As discussed more fully under the heading, â€śRestructuring Charges,â€ť Customer Management recorded a $6.5 restructuring charge in 2006.

Operating Income

As a result of the foregoing, Customer Managementâ€™s operating income and operating margin were $176.7 and 9.5%, respectively, compared with $202.4 and 11.2%, respectively, in the prior year.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and segment data. Detailed comparisons of revenue and expenses are presented in the discussions of the operating segments, which follow the consolidated results discussion. Results for interim periods may not be indicative of the results for the full years.

Three Months Ended March 31, 2008 versus Three Months Ended March 31, 2007

Consolidated revenues for the first quarter of 2008 were $716.4 compared to $719.9 in the prior year. Growth in revenues from HR Management and Customer Management largely offset an anticipated decline in Information Management. Operating income for the first quarter of 2008 decreased 40%, or $26.3, to $38.9 compared with $65.2 in the prior year. Operating income includes $21.2 of charges, including: (a) $14.1 restructuring charge taken to better align cost structure to business needs, (b) $4.0 in curtailment costs related to the pension plan freeze, and (c) $3.1 settlement charge pursuant to the senior executive retirement plan. The above charges were partially offset by a $2.9 gain from the sale of assets at HR Management.

Costs and Expenses

Customer Managementâ€™s total costs and expenses were $454.1, a 10% increase from the first quarter of 2007. Customer Managementâ€™s costs of products and services during the first quarter of 2008 increased 6% to $322.4 from the first quarter of 2007. As a percentage of revenues, costs of products and services were 67.7%, up 290 basis points from 64.8% in the prior year. The impact of revenue growth and cost saving initiatives were offset by increased labor costs and an approximately 80 basis point negative impact resulting from the weakened U.S. dollar. In addition, first quarter of 2007 results included an approximately 100 basis point positive impact from a one-time resolution of a prior cost. Selling, general and administrative expenses of $110.5 in the first quarter of 2008 increased 19% compared to the prior year. This reflects higher costs from capacity expansions during the current year to support anticipated revenue growth as well as costs from adding sales and consulting resources. As a percentage of revenues, selling, general and administrative expenses were 23.2% in the first quarter of 2008 compared to 19.8% in the same period last year. As discussed more fully under the heading, â€śRestructuring Charges,â€ť we recorded a restructuring charge of $5.4 during the first quarter of 2008 to better align cost structure to future business needs.

Operating Income

As a result of the forgoing, Customer Managementâ€™s first quarter 2008 operating income and margin were $21.9 and 4.6%, respectively, compared to $56.3 and 12.0%, respectively, in the first quarter of 2007.

Revenues

Information Management revenues of $163.2 during the first quarter of 2008 were down 12% compared to the corresponding period last year mainly due to North American client migrations.

Data processing revenues of $44.0 decreased 35% from the corresponding period last year largely reflecting North American client migrations. Compared to prior year, professional and consulting revenues of $63.3 remained relatively flat and license and other revenues increased 2% to $55.9. Higher international revenues from implementation of software and services partially offset the declines in North American clients resulting from migrations and program completions.

Revenues from Sprint Nextel were down 19% in the first quarter of 2008 compared to the corresponding period last year. We expect the revenues from Sprint Nextel to continue to decline as they migrate subscribers from our billing system during 2008.

Costs and Expenses

Information Managementâ€™s total costs and expenses were $133.7, a 17% decline from the first quarter of 2007. Compared to prior year, Information Managementâ€™s costs of products and services during the first quarter of 2008 decreased 15% to $88.7. The decrease in costs of products and services was due to cost reductions as well as the favorable impact of a shift in revenue mix from data processing to license and services. As a percentage of revenues, costs of products and services were 54.4% in the first quarter of 2008, down from 55.9% in the first quarter of 2007. Selling, general and administrative expenses of $20.2 in the first quarter of 2008 decreased 32% compared to the prior year, reflecting benefits from continued focus on reducing costs. As a percentage of revenues, selling, general and administrative expenses were 12.4% in the first quarter of 2008, compared to 15.9% in the prior year. The 44% decrease in research and development costs reflects our selective approach to research and development spending and focusing our efforts on only the highest impact areas. We are also adding some development efforts in Asia. As discussed more fully under the heading, â€śRestructuring Charges,â€ť we recorded a restructuring charge of $6.9 during the first quarter of 2008 to better align cost structure to future business needs as well as to shift the geographic mix of some of our resources.

Operating Income

As a result of the forgoing, Information Managementâ€™s operating income and operating margin during the first quarter of 2008 were $29.5 and 18.1%, respectively, compared with $25.3 and 13.6%, respectively, during the first quarter of 2007.

Revenues

HR Managementâ€™s revenues in the first quarter of 2008 were $77.2, a 19% increase from the first quarter of 2007. Revenue growth due to a contract termination payment received during the quarter was partially offset by declines from the completion of legacy programs.

Costs and Expenses

HR Managementâ€™s costs of products and services during the first quarter of 2008 increased 19% to $60.9 from the first quarter of 2007. This increase was due to the costs related to the client contract termination identified above, partially offset by efficiencies with clients currently in live operation. Selling, general and administrative expenses of $16.8 in the first quarter of 2008 decreased 5% compared to the prior year, reflecting improved employee productivity. As a percentage of revenues, selling, general and administrative expenses were 21.8% in the first quarter of 2008, compared with 27.2% in the prior year, primarily reflecting revenue growth. As discussed more fully under the heading, â€śRestructuring Charges,â€ť we recorded a restructuring charge of $1.8 during the first quarter of 2008 to better align cost structure to future business needs. Results include a $2.9 gain from the sale of assets.

Operating Income

As a result of the forgoing, HR Managementâ€™s three months ended March 31, 2008 operating loss improved to $4.9 from $7.4 in the same period last year.

2008 Restructuring

During the first quarter of 2008, we initiated a restructuring plan to align resources to future business needs and to shift the geographic mix of some of our resources. The plan resulted in a restructuring charge of $14.1 that will be paid pursuant to our existing severance policy and employment agreements. These actions, which will affect approximately 750 professional and administrative employees worldwide, are expected to be completed by the end of 2008.

CONF CALL

David Stein - Investor Relations

Thank you, Amy and good morning. Welcome to Convergys' second quarter 2008 earnings call. This call is the property of Convergys.

With me on the call today are Dave Dougherty, our President and Chief Executive Officer; and Earl Shanks, our Chief Financial Officer. Dave will provide a summary of our operational results and Earl will follow up with financial performance and forward guidance. Then we'll open the call for your questions.

Today's discussion contains a number of forward-looking statements including future financial results, operating projections and cost estimates that involve potential risk and uncertainty for Convergys. Future results could differ materially from those discussed. Please refer to Convergys' most recent news release and filings with the SEC for additional information including risk factors. Currently we do not intend to revise or update any forward-looking statements made during the call.

Also during the call we'll discuss non-GAAP financial measures including free cash flow. Free cash flow should not be construed as being more important than comparable GAAP measures. Convergys' management believes free cash flow provides the users of the financial statement with a more comprehensive understanding of the company's underlying performance. A reconciliation of free cash flow to operating cash flow is available on the Convergys website at www.convergys.com.

Now I'll turn the call over to Dave.

David F. Dougherty - President and Chief Executive Officer

Thank you, David and good morning. Convergys was able to grow earnings per share in the second quarter in the face of a challenging economic environment. Earnings of $0.32 per diluted share were up 14% from the second quarter a year ago. These results include the impact of strong cellular partnership earnings, lower tax and our aggressive share repurchase program.

While I'm pleased with the performance of Information Management and HR Management in the quarter, our Customer Management results need to be better. I have great confidence in the new Customer Management leadership team. They are focused on the right things, and we expect to see growth in revenue and operating income in this business beginning in the fourth quarter.

I also want to highlight important progress we've made on a number of fronts across the business. Specifically, we were recognized by our largest client, AT&T as one of their key suppliers. We negotiated a contract renewal with one of our largest customer management clients that includes higher pricing in a contract value of more than $400 million over two years.

We delivered very strong license revenues and terrific operating margins in Information Management. HR Management results improved significantly from year ago. Last week, we announced the Intervoice acquisition to enhance our capabilities and leadership in relationship management.

In just this past weekend, we successfully passed a critical milestone on the way to go live in the U.S. and Puerto Rico for a large HR BPO client in August of this year. I want to emphasize this is a significant, significant accomplishment. I am very proud of the Convergys team and their unrelenting determination to make this implementation a success.

As you know, successfully completing these large global HRO implementations is key to driving value creation in this business. As we look ahead, we expect solid performance from Information Management and the cell partnership and a favorable tax rate for the year. The loss in HR Management to be slightly larger than planned. And as I just said, successfully completing the large implementations is a key value driver for this business.

Our biggest challenge and our opportunity right now is Customer Management. Our plan for the year was heavily dependent on significant revenue and margin growth in the second half of 2008. During the second quarter however, we began to see lower call volumes and forecasts for lower volumes from some of our large clients due to the general economic conditions, and from improvements in their operations and service delivery.

Also, despite the sizable pipeline, we've not seen the conversion progress as quickly as we had anticipated. As a result, we now expect our third quarter results in Customer Management to be roughly in line with the second quarter, and meaningful growth in revenue and margin beginning in the fourth quarter. Despite the over performance in other parts of the business, we can't overcome the expected shortfall in Customer Management.

Given this and the uncertain economic environment, we believe it is prudent and appropriate to lower our EPS guidance for the year to $1.15 to $1.20, including the impact of the expected Intervoice acquisition. Revenues are expected to be at the lower end of our previous range.

It is disappointing for us to lower guidance, particularly since we've consistently grown our EPS for the last three years. The Convergys team is committed to achieving our updated guidance, and making sure we're doing the things today required to accelerate growth in the future.

Turning now to each of our business segments, let me begin with Customer Management. First, we're taking decisive action to improve Customer Management revenue growth. During the quarter, we completed several contract renewals and extensions, we announced the expansion of operations in the Philippines, and launched our portfolio of multi-channel automated solutions for in-house customer service operations.

In the quarter, we received AT&T's supplier recognition award for teamwork. We were acknowledged for consistently providing better products, services and solutions to help AT&T deliver outstanding service to their customers. Our goal is to have leading customer satisfaction scores, which are a key component of our value proposition and our ability to build share.

Year-to-date, we have been able to negotiate price increases with a number of our largest clients. These increases are helping to offset higher cost, and they are also a part of our effort to ensure all our client relationships produce acceptable returns.

While Customer Management revenues increased in the second quarter, call volumes for a number of large clients were down versus year ago. Also call forecast through the balance of the year are in some cases less than what we anticipate. There are several reasons for this. With some of our clients, declining volume is directly related to the impact of the economy. For a few clients, initiatives they have undertaken to improve network reliability and to consolidate systems have also impacted call volumes. And finally, some clients are using more automation rather than live agents to deflect, handle or avoid cost.

While we can't control all the factors affecting call volume, we can ensure that our products and services are meeting our clients' needs and in particular, their needs for more automated solutions. Recently... we expect the recently announced Intervoice acquisition to enable Convergys to fully participate in our clients' growing use of automation of their call handling strategies. By meeting this need, we believe we will be rewarded with a larger share of spend and stronger relationships.

Furthermore, as a leader in the industry, we see significant opportunity as clients consolidate vendors to a single source one-stop provider like Convergys. Once the acquisition of Intervoice is complete, we believe our unique blend of automated and live agent solutions and our scale will set us apart in the marketplace.

We expect to accelerate Customer Management revenue growth beginning in the fourth quarter, by expanding our strong relationships to grow share with our existing clients, bringing up large blocks of capacity to serve immediate client needs and extending our operations in the geographies that align with market demand.

We expect our expanded sales force to capitalize on our improving customer satisfaction scores and the available capacity to win new business with existing clients. As a leader in the industry, we also see opportunity for growth as clients move more of their business to larger more financially stable providers like Convergys.

The new Customer Management team has also been working to get more revenue out of existing sites. They have identified by site the available seats and the type of work that can be done for clients depending on the available labor. We're consolidating smaller blocks of available capacity into larger blocks. These larger blocks are more attractive to both current and prospective client as they make it easier for them to grow within the same location. The sales force is focusing on selling this available capacity, which we expect to be sold rapidly and ramped over the next few quarters. This is very profitable revenue, because of the physical infrastructure and management is largely in place.

We are also working to better match available contact center capacity to meet our clients' global demand. For instance, our Philippines capacity coming online next month has already been sold to existing clients, and we now have a solution for Latin America bilingual demand as well.

We are working to improve Customer Management operating margins. In the second quarter, margins were impacted by substantial increase in foreign exchange currency expenses, $10 million for two margin points compared to the first quarter, and continued investments to deliver the anticipated growth. To help improve margins, in the second quarter, we renegotiated client contract pricing in terms and we have been rationalizing Canadian operations, announcing the closure of four centers, three of which have been completed. However, the short term impact of the transition of this work to other geographies has hurt profitability as well.

We expect to improve Customer Management operating margins over the next few quarters through growth with the existing clients and the incremental contribution associated with the increased volume, partnering with our clients to improve contract terms including additional price adjustments to ensure adequate returns and better currency protection, improve management of labor by streamlining and more tightly managing staff to react faster to shifts and demand with direct and indirect labor. I am confident that these actions are the right ones to accelerate revenue growth and improve margins in this business.

Let me now talk about Information Management. During the second quarter, Information Management completed a large license sale with a communications client in North America, announced a new Infinys agreement with India's largest telco, BSNL, went live with services at Australia's largest independent services provider and entered into a partnership with Alcatel-Lucent to sell Infinys globally. The Sprint migration was substantially complete at the end of quarter.

Also during the second quarter, we made two small strategic acquisitions to expand our solution footprint. BMI in China for its web self-care service provisioning and workforce management capabilities and Visage's Subscriber Management Platform for mobile virtual network operators. The team here has done a great job managing profitability in this business year-to-date.

Moving to HR Management, the second quarter was the fourth consecutive quarter of improving HR Management operating performance. There was a substantial improvement in HR Management operating loss during the quarter versus prior year. As I mentioned earlier, just this past weekend, we passed key schedule milestone with a large HR BPO implementation and are moving forward as planned to go live in August.

Let me close by saying, this leadership team has a very good understanding of our challenges and opportunities. We're taking decisive action to accelerate growth and we are committed to achieving the updated guidance. We are fixated on improving productivity, delivering outstanding quality to our customers and making our technology and global footprint a competitive advantage to drive sustainable growth and profitability.

At this time, I'll turn the call over to Earl, who'll provide greater detail on our second quarter financial results and forward guidance.

Earl C. Shanks - Chief Financial Officer

Thank you, Dave and good morning. For the quarter, Convergys revenues were $690 million. Operating income was $48 million; EPS of $0.32 was 14% above last year and was better than expected.

Turning to the segment, Customer Management revenues increased to $469 million. We had strong growth with some communication clients, and healthy growth in other markets as new programs came online. At the same time, call volumes with two large communications clients declined in the quarter. This reflects capital program changes, and increased use of in-house automation. There was also a decline with a large financial services client, due to program completion and softness in the sector.

At the end of the second quarter, Customer Management had approximately 24,500 employees in Asia. This was an increase from 22,000 employees in the second quarter of 2007. We had less than half of our Customer Management employees in the U.S., with about 20% of the Philippines, 15% in India, and 15% in Canada.

Customer Management operating income in the second quarter reflects a substantial increase in cost due to foreign exchange of about $14 million, or 300 basis points negative impact year-over-year. Other key factors impacting operating margins included price increases with several clients and investment in infrastructure, available capacity and additional sales resources.

Moving to Information Management, Information Management revenues of $161 million were down largely due to client migrations in North America. Team worked hard to close two large deals in the quarter, which were originally expected to be closed later in the year. We signed a large license deal with a U.S. communications provider, and the Sprint migration was largely complete at the end of June, which resulted in recognition of additional termination revenues in the quarter. Given the second quarter license revenue acceleration in Information Management, we're likely to see softness in the second half of the year.

Operating income was about the same as last year, with an improved operating margin of 23.5%. We kept R&D expense down by moving development offshore, focusing on only the highest impact areas, and acquiring technology through product partnerships with small acquisitions. Based on specific opportunity, we may increase our R&D investment in future quarters.

Moving to HR Management, HR Management revenues were $59 million, generally consistent with the last few quarters. As you'll recall, our first quarter results included severance revenue. At the end of the second quarter, we discontinued an activity for one of our large HR BPO client that has been generating revenue some pass-through revenues with no margin. This will impact revenues in the second half.

HR Management operating loss improved by $13 million in the quarter compared to the prior year. Recall, last year we expensed $6 million in implementation cost related to a large contract. The improvement also includes the impact of tight management of SG&A expense.

Let me now turn to other item. Earnings from the cellular partnership were $11 million in this quarter, an increase of $8 million over the prior year. The tax rate was 24.9%. DSO increased in the quarter due this timing of payments for project milestones in our international business. Net deferred charges increased $52 million in the second quarter.

As I've said on several occasions having access to capital market is important to us. Our investment grade ratings supports this position and also is valued by clients. The company uses of cash, our priority are to a sure liquidity to invest, to improve and grow the business and share repurchases. I will remind you that we have invested $117 million to repurchase shares year-to-date. This includes $55 million in the second quarter. With the Intervoice acquisition, liquidity and investment in the business become a more significant near term priority.

Free cash flow in the second quarter was negatively impacted by the deferred charges. Free cash flow in the second half will improve significantly due to increase in payments from our clients for the HR implementation, deduction in DSO particularly due to collection of project payments from our international programs and other improvements in our working capital balance.

In the first half of the year, we received $20 million in distributions in the cell partnership, which is not included in free cash flow. For the remainder of the year, we expect distributions from the cell partnership to approximate our share of income.

I will now move to a discussion of our forward financial guidance. As Dave pointed out, the performance of our business on a consolidated basis has been solid year-to-date. Yet, with the continued difficult macro economic environment, we now believe results in the second half will be softer than we previously expected.

Our updated guidance for 2008 included... including the anticipated closing of the Intervoice acquisition in the third quarter is as follows. 2008 revenues at the lower end of the previously provided range from $2.85 billion to $3 billion. GAAP EPS of $1.15 to $1.20. This includes the $7 million to $10 million of cost in 2008 related to the Intervoice acquisition that I referenced on our call last week.

Customer Management revenues of about $2 billion. We expect the Customer Management operating results in the third quarter will be about the same as in the second quarter. We expect to see improvement in Customer Management operating results in the fourth quarter. We expect the impact of seasonality in the second half to be somewhat muted compared to what it has been in the past due to the economic environment. As it is difficult to time a broader recovery in the economy, there is an element of uncertainty to the growth forecast for Customer Management.

Information Management revenues of more than $600 million, with an improved operating margin expectation now in excess of 17% for the year. HR Management revenues remain in the $260 million to $270 million range with an operating loss of about $20 million. This includes higher cost than previously anticipated from a large client that is expected to go live in August.

We will continue to update this as we approach key milestone days in moving to ongoing operations. We expect continued strong contribution from the cell partnership, with performance similar to the second quarter throughout the remainder of the year. We're modeling an effective tax rate of about 25% for the full year. Free cash flow together with cash received from our cellular partnership should approximate net income.

Now, I will turn the call back over to Dave for a few concluding remarks.

David F. Dougherty - President and Chief Executive Officer

Thanks, Earl. We remain very encouraged about the future prospects for the business. We've got a great team that's committed to doing what's in the best interest of our clients, our shareholders and our employees.

The customer care industry fundamentals offer particularly compelling opportunity, despite what we're experiencing in the short term. The 300 billion, the market opportunity is large, and the demand is strong. With our relationship management strategy, we believe we can serve the evolving customer and employee needs of our clients, broaden our addressable market and position Convergys for continued leadership in the future.

We are doing all we can to make sure our Customer Management recovery is swift and complete and continue to be confident in our long-term growth prospects for all our business. At this time operator, please open the line for questions.